At last week's Emerging Channels conference, Ann Stephens of PC
Data posted a chart (see page 2) that points to a quiet but profound
upheaval--a paradigm shift, perhaps--in the retail channel. Over the
past three years, says Stephens, software sales volume through
traditional mail order and software-only stores has declined
significantly. Increasingly, the real action at retail has shifted to
outlets that are relative newcomers to the software business--mass
merchants, price clubs, consumer electronics and office supply stores.

A lot of veteran channel managers insist these numbers are nothing to
worry about. They argue that hard-core computer enthusiasts and
corporate buyers still choose to buy from CompUSA and Egghead, and they
point out (correctly) that many of the new outlets for software have
proven to be expensive to support and prone to failure.

But we suspect the channel veterans are missing something important.
During the past few years, the software industry has largely
"crossed the chasm" (to use Geoff Moore's famous phrase)
from early adopters to a more mature, mainstream customer base. Almost
everywhere, software prices have dropped to levels that are consistent
with other mass-market consumer products. And it's no accident, we
suspect, that most of the industry's current design and marketing
hot buttons--ease of use, self-help content, multimedia, small business
solutions--happen to appeal primarily to Main Street and consumer
buyers.

Yet when we look at how traditional computer channels reach these new
PC users, it's clear there's a major disconnect. Yes, some PC
enthusiasts do visit neighborhood computer stores with some frequency.
But the majority of mass-market buyers and small business owners spend
far more time hanging out at shopping malls, supermarkets, book and
record stores. They watch home shopping shows on TV; they join book
clubs and rent movies from Blockbuster. Worse, key demographic segments
of the PC user base--in particular, women--rarely shop in any computer
outlets.

As a result of this growing disconnect between products and buyers,
thousands of retail SKUs (at least 16,000, according to the latest
counts) now jostle for a shrinking amount of shelf space in computer
stores. Toss in publisher consolidation (which tends to take shelf space
away from smaller developers) and fierce price competition among
best-sellers--and the traditional retail channel begins to look like a
dangerous bottleneck to the industry's long-term growth.

So where will we find new shelf space (and buyers) for software? In
fairness, the skeptics are right: We won't reach software buyers
simply by parking a crate of fresh databases next to a grocery
store's avocado display. Even outlets that seem closer in concept
to software--such as book, music, and video stores--have seen software
trails crash and burn.

Much of the problem lies with the software itself, of course.
Mainstream buyers want appliance-like simplicity and out-of-the-box
practicality, and they don't find these qualities in many products
designed for early adopters. (It's interesting that software may
not sell well in book stores, while "Dummies" books about
using software are best-sellers.) In addition, new channels typically
require different packaging and merchandising configurations, new price
points, and new business practices; their customers respond to sales
messages that may be radically different from traditional software
marketing themes. None of these changes are trivial, and inevitably many
publishers will fail to make the transition.

In fact, it's tempting to compare the migration to Main Street
retail channels to the Internet revolution. Just as the Internet forced
a painful re-thinking of products and channels, the new retail
marketplace is likely to create profound upheaval and new competitive
opportunities. We're not sure who'll become the Netscape of
the Main Street channel--but there are certainly contenders already
eager to play that role..

Ultimately, though, we don't expect the rise of new retail
channels to create anything like the Internet revolution. The good news
is that software publishers this time are moving into well-explored
territory. The mainstream retail world may not fully understand
software, but they do know what works (and doesn't work) in
packaged goods, in traditional enthusiast markets, and in small business
sales. "This isn't rocket science," says Bob Citelli, a
software distribution expert who spoke at the Emerging Channels
conference. "It's just retailing."

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